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This week in tax: One step closer to public CbCR

This week the European Council (EC) adopted the proposed directive, making public country-by-country reporting (CbCR) a real possibility across the EU.

The Council adopted its position on the proposed directive regarding the disclosure of income tax information by certain undertakings and branches. This will pave way for the adoption of public CbCR.

The Commission first identified the need for fairness and transparency and for the Union to act as a global reference model in 2015. The proposed directive, first tabled in April 2016, was part of the European Commission’s action plan for a fairer corporate tax system.

Transparency is essential for the smooth functioning of the internal market, and I am pleased that we have stepped up our ambition for tax transparency,” said Zdravko Počivalšek, Slovenian minister for Economic Development and Technology.

The adoption of the Council’s position on September 28 followed a provisional agreement reached with the European Parliament in June.

Negotiations between the co-legislators started in March 2021, resulting in a provisional agreement on June 1 2021, and finalising specifics such as the transition period and the safeguard clause.

Top ITR headlines this week:

EU moves a step closer towards public CbCR

Tax directors fear DSTs could remain after an OECD agreement

Taxpayers could turn to ADR over threat of post-COVID tax disputes

US tax regulation still too ambiguous on classifying crypto assets

Tax directors fear DSTs could remain after an OECD agreement

Governments may be reluctant to roll back unilateral digital services taxes (DSTs) even after an OECD solution on pillars one and two has been agreed, creating risks of double taxation.

As the OECD works on brokering an agreement on a global tax system, tax directors at multinational enterprises (MNEs) are concerned that an international agreement will not be enough to put an end to unilateral DSTs.

“Our fear to a certain extent is that countries want to see whether or not they get enough taxes… from this new OECD framework,” said one tax director at an MNE at ITR’s Taxation of the Digital Economy summit.

“If they don’t see the revenues coming in as they saw under the DST, probably they might reconsider abolishing the DST,” added the tax director.

DSTs became a trend globally in 2020 as governments, tired of waiting for an OECD-brokered multilateral solution, moved to tax digital economy MNEs that operate in their region.

EY found that more than 20 countries worldwide had enacted DST legislation by June 2021, including Spain, Turkey, and India. Some US states are also considering DSTs, although this has created legal problems for the state of Maryland due to allegations of unconstitutionality.

The COVID-19 pandemic and ensuing budget crisis for governments provided an additional driver for taxing MNEs. 

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US tax regulation still too ambiguous on classifying crypto assets

The Internal Revenue Service (IRS) needs to clarify how cryptocurrencies and other digital assets are classified for tax purposes.

Classifying cryptocurrency for tax purposes is a difficult question for tax practitioners. In some cases, tokens may be used analogously to foreign currency, a commodity or security, but by itself, it is a fungible intangible asset.

“As a tax advisor, we don't have specific rules for crypto or digital assets but we have rules in the tax code for intangible assets,” said Stephanie Latombe, partner at Mazars, speaking at ITR’s Women in Tax forum.

Panellists said that the lack of clear guidance has left them to rely on analogies between different assets. However, the IRS has not always agreed with this approach. So it is not a long-term solution.

“It's really important to document the analogies you're making because there isn't a lot of guidance. This is something from a tax point of view that's looked at as property and so an agent can easily say it's not stock so why are you making the analogy ‘X’ when you should be making it ‘Y’,” said Faye Tannenbaum, partner at Mazars.

“The best we can do at this point is take the position we feel most comfortable with and document it to make sure you tell the story of why this is exactly like whatever analogy you're drawing without the guidance that we need,” explained Tannenbaum.

The tax treatment also differs if the taxpayer is holding the cryptocurrency or using it. Certain types of coins are used primarily in transaction flows to buy and sell things or to move money quickly across borders.

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Next week in ITR

The US Congress has stalled its vote on the Biden tax reforms that could make or break the hopes for an international solution to taxing the digital economy. However, ITR will be keeping a close eye on US developments. The clock is ticking for a multilateral agreement.

In the meantime, ITR will be analysing how companies can best meet the compliance burden of DSTs. Governments may decide to keep unilateral measures despite the progress towards an OECD agreement in October.

ITR will also be reviewing the top tax disputes of the last quarter and what these cases mean for taxpayers around the world. This includes the most important transfer pricing (TP) and indirect tax cases.

Readers can expect these stories and plenty more next week. Don’t miss out on the key developments. Sign up for a free trial to ITR.

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